Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Friday, September 10, 2010

Krugman: Government is not a burden; It creates wealth!

[NOTE]: In answer to a comment from AP Lerner regarding the behavior of interest rates and government bonds, I will be answering that question via an article I will send to the Mises Institute page. That will give me more space to deal with this question, the same one that Paul Krugman has been asking in his columns: If the "bond vigilantes" were right, why have interest rates fallen instead of going up? I'll post the column when it is put up on the Mises page. That means the answer will be coming in a few weeks.

On another point, I know that some of you have seen your comments disappear. I am NOT deleting any of them. Yesterday, I was having problems of my own dealing with Blogger, and so I believe that what we are seeing is a technical issue at work that is beyond my own blog. I'm sorry that you have experienced those problems, but I also want you to know that I don't delete things just because I disagree with them. [END NOTE]

In his missive today on Japan and the state of its economy, as well as the state of our own economy, Paul Krugman decides that being a partisan hack is good economics. While I hold no love for the Republican Party and fully agree that the Bush administration was irresponsible and profligate, nonetheless, when the Democrats took power, they did not put the brakes on runaway spending, but, instead, stepped on the accelerator.

Here is the problem. While Krugman and the Democrats rightly accuse the Republicans of "running the economy into a ditch," they don't say how it was done. After all, with the explosion in government spending during the Bush years, they cannot accuse the Republicans of not spending enough "to give the economy traction."

Yes, the purposeful diversion of huge amounts of money into the housing market created a destructive bubble, but even there, the Democrats and Krugman have a problem. First, if all that is needed is more spending, then why did the attempts to continue to prop up the housing market fail miserably?

If recessions are caused simply by a drop in private spending (both consumption and investment spending), then fixing it should be easy: Ben Bernanke can just fly lots of helicopters over the country and drop money. Since government is not "revenue constrained," as the Chartalists are fond of reminding us, the solution is easy. As Robert Murphy noted in this article, since government monetary creation "abolishes scarcity," fixing the current problem is a helicopter drop away.

Furthermore, spending is spending, and since the Bushies launched wars on the other side of the world and spent, spent, spent, it would seem to me that they were increasing the "aggregate demand" that Krugman claims is the key to prosperity. Yet, why did the boom turn into a bust? The Austrians have the answer, but Krugman and his followers (the entire U.S. Government apparatus) certainly are not going to listen.

I also wish to address one more issue, and that is Krugman's claim that ObamaCare is a cost-cutting measure. He says:

(The Republicans) also surely (will) try to repeal health reform, which would be another twofer, reducing economic security even as it increases long-term deficits.

What is Krugman's proof that this initiative will lower the future federal deficits? He cites studies from the Congressional Budget Office, studies that were made by Democrats to benefit Democrats. Now, I like to see empirical evidence as much as the next guy, but I am NOT going to accept partisan political speculation of something that supposedly will happen in the future as "empirical evidence" of something that is GOING to happen. That is not economic analysis; it is simply partisan hackery. Furthermore, name me one "cost-saving" government spending program that has cut the federal deficit. These "programs" are nonexistent.

As some of the people commenting on this blog have noted, Krugman was calling for a $1.2 trillion "stimulus," but we got "only" $800 billion. Now, we are supposed to assume that for want of just $400 billion more, the economy would have been close to "full employment." That seems absolutely ludicrous on its face. Furthermore, he demonstrates no causal mechanism on how that extra "stimulus" would have translated into longer-term economic benefits. By claiming that all of this is the fault of Goldstein the Republicans, Krugman further moves away from economic analysis into the world of pure partisan politics.

As an aside, I would highly recommend you and others on this blog read Crisis Economics by Nouriel Roubini and Bailout Nation by Barry Ritholz for a better understanding of what caused the financial crisis and our modern day depression. Barry is not an ideologue,and like me lives in a world supported by data and facts, so his book may not be welcomed by many on this blog.

Repeatedly blaming the government for everything is not only bad economics, it’s not even remotely accurate. But hey, it fits your ideology, so keep running with it.

“First, if all that is needed is more spending, then why did the attempts to continue to prop up the housing market fail miserably?”

Where did Krugman suggest propping up housing market was a good idea? Did he specifically suggest the wasteful first time home buyer credit? Please provide a link; this would be news to me.

Despite what you believe, Krugman does not control the democrats in charge like a puppet. If he did, then there would be have over a trillion dollars in INFRASTRUCTURE spending passed in early 09, not a stimulus that consisted 40% of tax cuts. You’re making things up to fit your point of view, again.

“Furthermore, spending is spending, and since the Bushies launched wars on the other side of the world and spent, spent, spent, it would seem to me that they were increasing the "aggregate demand" that Krugman claims is the key to prosperity”

Further proof you do not understand Keynesianism.

“Now, we are supposed to assume that for want of just $400 billion more, the economy would have been close to "full employment”

No. But we should be able to assume you can honestly report what Krugman was saying. Krugman called for $1.2T, you claimed he called for $2.4T. I was pointing out the inaccuracy of your statement, and making no claims to the amount of appropriate stimulus. Occasionally, folks on this blog are light on facts, this is an example.

Because Bob Roddis is having problems posting, I will put his comments here.

I don't know what is causing the problem, but here are the comments:

Due to disappearing comments, I’m responding to the “aggregate” demand inquiry from the Poem post here.

On “aggregate” demand. It's a rough statistical category, but in the real world, there is no "thing" as aggregate demand. Or “macroeconomics”. So what if you take a snapshot of what everyone allegedly bought on a certain day or period? Nevertheless, there is no independent entity consisting of the "aggregation" of those purchases with any significance beyond each individual. Austrians think in terms of flesh and blood individual people and their real world stuff. Each person has his/her own unique value system which is ever-changing. One of your major conceptual problems is thinking that these various aggregates and data collections you love so much actually exist as “things” in the real world while you ignore what is real in the world. Your are deluded into thinking that your model is, in fact, the real world.

I explained your chart before. The government goes into debt and someone buys the securities. Both sides balance. So what? That is not real savings. Beyond that, you explain it. You don't even have a theory for the conclusions you draw from the chart. You've lost the argument right there.

For whatever it's worth, I've posted a third chapter in my response to McCulley four times. It appeared as posted for 2 minutes and then disappeared.

Here's another try:

Fiscal deficits are not crowding out private sector borrowing because the private sector doesn’t want to borrow.

The private sector doesn’t want to borrow because the donut eater state is interfering with the necessary re-pricing and is engaging in other instances of “regime uncertainty”. By seizing and engaging assets in artificial donut eater projects, the donut eater state is indeed “crowding out” private investment of those very same assets. This McCulley claim is absolute nonsense and seems to be the [hard] core of his nonsensical world-view.

Rather, fiscal deficits are facilitating the private sector’s desire to save more, delevering their balance sheets. Remember, the government sector’s liability is the private sector’s asset!

The private sector needs, in fact, to really save more. Really. In other words, people need to save and invest their own income and earnings for the future in true entrepreneurial activities with an expectation that their money will maintain its value over time so that long term economic calculation is possible. Buying debt securities derived from donut eater debt projects (razed sports stadiums????) to be paid back by seizing future taxpayer funds (or with fraudulently diluted funny money) is not the same thing as saving ones’ own income for the future coupled with private sector economic calculation.

Razed sports stadiums says it all: The complete opposite of investment in an entrepreneurial project which would create a better line of capital goods. Chartalist "savings" are not real world "savings". They are two completely different concepts. Here we have language debasement to go along with currency debasement. Fraud meets more fraud. Who knew?

So according to the CBO the Stimulus package created or saved as many as 3.3 million jobs. So lets say that the CBOs estimate is incredibly liberal with job creation and that i saved 2 million jobs. Now lets realize that that tax cuts constituted 40% of the bill so direct public investment was only around 500b of the bill. 2.5x500b=close to 5 million jobs created or saved (Again conservative estimate). So lets assume the extra stimulus had roughly the effect of the first in job saving creating measures. That would mean that nearly 3 million more jobs would have been created or saved just by adding the extra 700b. Which would leave us with roughly 5 million jobs lost. Which would be horrible still but the added stimulus would have negated a very large amount of un employment and we would be much closer to full employment than we currently are.

but the added stimulus would have negated a very large amount of un employment and we would be much closer to full employment than we currently are.

A thousand times no. "Jobs" are not an aggregated lump of homogenous stuff. Further, there is no basis to conclude that “jobs” created with borrowed money for donut eater projects during a period of “regime uncertainty” and during a period where the government is impeding a necessary re-pricing following a funny money distortion boom are in any way sustainable based upon actual consumer demand. And we cannot ever know such actual consumer demand due to regime uncertainty and the impediments to the necessary re-pricing. Dancing in the dark.

This entire Keynesian/Chartalist nonsense is just like arguing with the Maoists back in the 1970s. IT WOULD HAVE WORKED IF ONLY THEY HAD DONE IT MY WAY BUT THEY JUST DIDN'T DO IT RIGHT!!!

The fact that money has been spent on transfer payments and not on "stimulus specific projects" or whatever doesn't prove that "stimulus" can possibly ever work. This has to be the most desperate, pathetic comment ever.

In July 2001, Paul McCulley, an economist at Pimco, the giant bond fund, predicted that the Federal Reserve would simply replace one bubble with another. "There is room," he wrote, "for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing."

As Mr. McCulley predicted, interest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst.

Now the question is what can replace the housing bubble.

*******

So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it's hard to imagine what that might be. After all, the Fed's ability to manage the economy mainly comes from its ability to create booms and busts in the housing market. If housing enters a post-bubble slump, what's left?

Uh, Bob. You do realize the 2009 and 2010 figures you’re using are estimates, right? And you do realize its September 10, 2010, right? And you do realize updated stats are available, right? See the chart in the link provided, source by Eurostats. Oh, I know, Eurostats has a liberal bias. Never mind. And, of course, using the link you provided, where the data was actually not an estimate, it shows spending moving up inline with recent history. So thanks for proving my point for 07 and 08 that spending did not acelerate. Much appreciated.

And, a word of advice, you may want to stop commenting on the McCulley piece. My open letter was to Prof. Anderson, and frankly, you sound kind of silly always talking about donuts.

Does paying unemployed workers to bury and then dig up bottles of Raisinets count as a mere transfer payment or a stimulating exercise in donut-eater directed “stimulus” sufficient to obtain the necessary missing “traction“ and/or the filling of the proverbial "hole"? What criteria would we use to know the answer?

I don't really agree with a lot of what AP posts, but you really can't argue with Paul McCulley. He's made more money for more people than everyone on this blog combined. His track record is pretty darn impressive. Can't argue that. I'm with McCulley on this.

Being able to brilliantly predict money making opportunities during a boom using data and statistical based pattern analysis is not coextensive with understanding why fiat money booms can't last or knowing how to return to sustained growth in the current environment.

That's exactly why he has more credibility than you and anyone else on this blog. And he was ahead of the downturn, and is still making money for himself and his clients. Check his performance. He puts his money where his mouth is and does not sit around rambling about theory and blood and donuts. His track record speaks for itself.

Im really curious as to if you consider Chinas economic stimulus a failure? They invested 500b USD in infastructure and social welfare and their economy in 2009 grew by 8.7% well above the original World bank estimate of 6.5%. Roughly the same in real numbers but as a % of GDP it was much larger. Not to say that stimulus works but it can prop up spending to allow the economy to get back on track, and dramatically improve peoples lives.

So what? Peter Schiff and Jim Rogers are making money for their clients. Lots of money is made by ridding bubbles, granted the purpose of money printing is to transfer wealth from the productive class to the political class. However bubbles can be avoided and long term sustainable growth is possible with a steady money supply and market driven interest rates.

China's stimulus came from savings not debt. China's economy is productive and would have grown without stimulus. The U.S. must print its stimulus and the U.S. economy is primarily consumption and service based. Big difference. Although it is interesting that China's stimulus allegedly worked while the larger U.S. stimulus didn't, it implies a fundamental difference in the two economies, perhaps production vs. consumption.

LOL Jason you missed the entire point as a percent of GDP Chinas Stimulus was much larger. I agree they would have still grown but the stimulus added somewhere around 2-4% extra. Math is your friend when it comes to economics not just ideology.

I figured someone would bring up the Schiff hit piece. Show me anyone who entered the market at the height of the bubble and didn't lose money in '08. Now if you bought gold and oil 10 years ago with Schiff you'd be in great shape in '08 and today.

"... but the stimulus added somewhere around 2-4% extra"

Prove it! Science is your friend and a scientific hypothesis must be falsifiable. It is impossible to show that stimulus added anything extra, there was no control group. No one in the world tried a recovery sans stimuli. It is why the claims that things would have been worse without stimulus are nonsense. Furthermore when the stimulus fails, the Keynesians claim it wasn't big enough as if there is a magical sweet spot that we can somehow find with faulty models.

I think the idealist are those who believe there are men and women among us capable of centrally planning an economy and properly fixing the price of money.

If you cant explain your theory about how people behave to someone who hasnt taken 4 years of college level trigonometry and calculus classes, what good is it? Would i have to explain to you what an ivory tower is? All your math and charts dont mean shit if your just making them up anyway. GDP is meaningless. Why? Because any money the government has was "collected" from the private sector (the only sector of the economy that can create wealth rather than simply confiscate it), yet this is considered to be adding to GDP, when the reality is it is simply inefficient redistribution along arbitrary guidelines. Theres no rhyme or reason to what the government does other than what it get away with. Spend millions on a bridge noone uses or an airport noone wants? Fuck it, mark that as plus 5 billion GDP. Its a worthless measure of nothing and any calculations you manage to squeeze out of your ass with it are also meaningless. You are playing a shell game and i call bullshit

But, you retort, the private sector is ultimately on the hook for the government’s liabilities, so how can those liabilities be considered the private sector’s asset? Simple: They can be sold for hard cold cash. To be sure, someday the government’s debt must be rolled over, or retired. But in real time, government securities are assets of the private sector (or the foreign sector). And for a fiat currency country, there is no reason to think that the debt cannot be rolled over, as such countries have a technology called a money printing press.

So, ultimately we have government-induced wealth transfers from the poor taxpayer who must pay for the borrowing to build the donut eater razed stadium or else we have a government default on its loan obligations by paying its debts with diluted dollars. The Founding Fathers believed the latter debasement to be a capital offense. No wonder Chartalists don’t want to talk about theft, fraud and morality. Or the Constitution. Their entire program is based upon theft, fraud and profound immorality coupled with the debasement of the language.

The state isn't "revenue constrained", eh? Then why the proposed default: "paying" debt with diluted dollars?

To point one, you make the same simplistic mistake others on this blog make. It's not about spending. It's about the relationship of the public deficit to private savings. Would you not agree a tax cut (higher deficit) would add to private surpluses? Two ways to run a deficit, FYI. And it all goes back to public deficits=private savings.

Ok, my apologies, not spending but public deficit / private savings ratio. If I understand your arguments correctly that means that we've had an excess of private savings so we need public deficit to balance our sheet again (so to speak). The reason behinf that argument is that public deficit = private savings which makes sense ex-post but if there has been an increase in the money supply that means that ex-ante such an equality does not hold, so what am I missing here?

On a related note if, because of an increase in the money supply, private savings != public deficit then what? We increase public deficit so it equals private savings + increase in money supply by increasing the money supply which would leave us right where we are. So what's going on here?

The other problem I find is that the market can't really decide on who benefits with the increase in public deficit because a large part of it go to bailouts of specific coorporations which means that the companies who get thme are the ones with the best lobbyist AND it also means that the govt. would be just helping ineffcient industries and companies to stay alive at the expense of the population (i.e. that money could have been put to uses that serve everyone better).

Prove it! Science is your friend and a scientific hypothesis must be falsifiable. It is impossible to show that stimulus added anything extra, there was no control group. No one in the world tried a recovery sans stimuli. It is why the claims that things would have been worse without stimulus are nonsense. Furthermore when the stimulus fails, the Keynesians claim it wasn't big enough as if there is a magical sweet spot that we can somehow find with faulty models.

"

Messrs Blinder and Zandi took a shot at the proof. Do you have numbers that prove them wrong?

PS: Ireland tried to do it without stimulus. They recovered anemically, by trying the austerity plan and driving exports, mostly to us. And, lo and behold, this July they unveiled a (shocked voice) stimulus plan.

I don't even need numbers, my point is the method is fundamentally flawed. It's not scientifically possible to measure or model what the GDP would have been without stimulus.

Stimulus does give short term positive symptoms, which is why its so politically popular, but the underlying imbalances remain. As we have seen, as soon as the stimulus wears off the economy continues its correction, except now we are worse off as resources have been squandered again trying to re-inflate a bubble.

The Austrian critique of the Chartalists starts at "point 1" of their chain of logic. The Chartalists ignore this sustantive criticism, scream "ideology" and jump to point 17. At that point, they scream, "You're so dumb. We zig left and Krugman zigs right at point 17. You don't understand economics."

Note too that Mr. Wray himself uses the term "chartalist" in his paper.

The Austrian critique of the Chartalists starts at "point 1" of their chain of logic. I guess so. But the Chartalist critique of Austrians starts at point 1. The Austrians do not understand what money is.

Wray doesn't often call himself anything, but sometimes says "(Neo)Chartalist"

Mosler calls himself "Very Rich" from coming up with & following this theory - and does things like borrowing money from banks at 12% to buy gubmint bonds yielding 14% because a loon MIT economist thought they would default rather than "print" the money.

The general aim is whatever number achieves full employment of the workforce - say 2% unemployment.

The magic number depends on the spending.

If the government decided to give all the deficit spending $ to Bill Gates, it would probably be a high number, in the trillions.

The most popular & I daresay better proposal, with a smaller magic number, would be centered on a Job Guarantee - a WPA style gubmint job for any poor slob who is out of work and needs the dough.

Often the best people to decide what jobs the feds should provide should be the local governments and people where the unemployed workers are. Or it could be on stuff like fixing our decayed infrastructure - so bridges don't collapse and levees don't fail.

The dandy thing about a Job Guarantee program would be that contrary to mainstream belief about unemployment, it would fight inflation!

The dandy thing about a Job Guarantee program would be that contrary to mainstream belief about unemployment, it would fight inflation!

As I keep repeating, these guys have no understanding of (or even any familiarity with) the concepts of acting man, subjective value, economic calculation, Cantillon Effects, and/or the distortion of the price and capital structure.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).